Unilever Earnings Preview, What We’re Watching

Unilever (NYSE:UL), the second largest consumer goods company after Procter & Gamble (NYSE:PG), plans to announce Q1 earnings on April 28th and while we’re hoping to see the a favorable impact of price increases on revenues, we’re keeping an eye on the operating margins and overhead expenses incurred due to the post-merger integration of the numerous acquisitions Unilever made in 2010. We also look for spending and inflationary trends that could impact other consumer goods companies like Unilever (NYSE:UL), Kimberly-Clark (NYSE:KMB) and Colgate-Palmolive (NYSE:CL). We value Unilever with a $35 Trefis price estimate of its stock, at roughly 9% premium to its current market price.

Unilever Focused on Maintaining Market Share in Downturn

Unilever in 2010 focused on growing market share by reducing prices amid low employment and depressed disposable income levels, which led many consumers to substitute premium brands with lower-prices brands and private labels. Unilever increased promotional spending and advertising budget, which further squeezed margins. While this strategy put pressure on Unilever’s product pricing and profit margins, it helped the company maintain market share.

As a result of rising commodity prices, Unilever had impacted price increases in the last quarter. Also with gradual overall macroeconomic recovery, we do not expect the rise in prices to have significantly impacted the sales volumes. Hence, facilitated by both, a growth in volumes and a favorable price impact, we’re expecting a higher dollar value growth in revenues in the past quarter.

Impact of Mergers

In an attempt to double its revenues with a decade, Unilever under its current CEO, Paul Polman, has been on an acquisition spree with the recent $1.8 billion acquisition of Sara Lee’s European detergent and shower gel business (see Unilever’s European Expansion Lifts Stock) and the $3.7 billion all cash acquisition of Alberto Culver (see Unilever’s Alberto Culver Acquisition Adds Shine To Stock) that added premium hair care brands TRESemme and Nexxus to its portfolio of leading hair care brands, Dove and Sunsilk. The company recently announced selling Sanex brand of personal care products for $954 million to Colgate-Palmolive (NYSE:CL) in exchange for Colgate’s detergent business in Colombia for $215 million (see Unilever Sells Sanex To Colgate To Shed Weight Post Sara Lee Deal, Trefis, March 28′ 2011).

While the merger related costs such as bankers’ commission, legal counseling expenses etc are a one-time expense, the post-merger integration costs such as incoming employee pension liabilities and labor force rationalization (severance pay costs), organizational restructuring etc could continue draining away cash in the subsequent few quarters and hurting operating margins in the process. Also the widely professed synergies should show in terms of improvements in operating margins in a few quarters. Hence, we’re keeping a watch on the costs associated with Unilever’s aggressive inorganic growth through acquisitions.

You can see a detailed analysis of our $35 Trefis price estimate of Unilever’s stock here.